Status quo or token output hike likely outcome of Opec+ meeting

AS the world’s largest oil producers are set to discuss future production quotas at a key meeting on Wednesday (Aug 3), most pundits expect no change to the group’s gradual output increments, although some reckon a “minuscule” output boost is possible following US President Joe Biden’s visit to Saudi Arabia last month.

Singapore-based Vanda Insights founder and chief executive Vandana Hari said Biden’s visit to Saudi Arabia - the de facto leader of Opec - has put the spotlight on this week’s Opec+ (Opec and its allies) gathering, whose outcome would have otherwise been “fairly predictable” as production targets were expected to be maintained at an even keel for September.

This would be the first gathering of the petroleum exporting countries group since Biden’s visit to Saudi in late July. While the visit has raised hopes in Washington and perhaps put some pressure on Saudi Arabia and the UAE (United Arab Emirates) to respond to the US’ request to open the spigots wider - or at least be seen to be doing so - and help tame soaring inflation, Hari expects to either see the status quo continuing or a “token hike”. If the latter happens, it may help Biden “save face but would not actually translate into anything substantial”, she added.

“This week is all about Opec+ and since this will be an in-person gathering, we should expect the unexpected,” remarked Edward Moya, Oanda’s senior market analyst, the Americas.

He added: “Given the weakening crude demand outlook, a small output boost seems unlikely, but you never know with the Saudis. The White House is hoping Opec+ will deliver more production, but what will truly motivate the oil cartel is the recent rise in US production and potential loss of market share as exports have increased significantly.” 

A new production hike by Opec+ is not likely at the upcoming meeting, said Stephen Innes, managing partner of SPI Asset Management, as many members are struggling to deliver total quotas. He pointed out that from October 2021 to June 2022, output has mostly undershot pledged increases. 

“The biggest problem with Opec+ is not the reticence of the 2 or 3 producers with spare capacity to boost output, but the gaping hole between collective targets and actual output, which looks set to persist,” said Hari.

Only Saudi and the UAE have spare capacity to tap, whereas the rest of Opec suffers chronic shortfalls from raised output targets.

“So, any potential crude supply response from the Opec to address elevated energy costs disproportionately relies on Saudi’s willingness to compensate for Opec’s  shortfall... willingness which was certainly not forthcoming,” said Vishnu Varathan, Mizuho Bank’s economics and strategy head in a note issued last month following Biden’s controversial trip to the oil-rich nation.

At the time of writing, Brent, the global benchmark, has fallen 0.73 per cent to US$99.30 a barrel while US benchmark, West Texas Intermediate (WTI) slipped 0.59 per cent to US$93.34 a barrel. Fears over broader recession risks, cemented further by weak July manufacturing PMIs (purchasing managers’ index), which could hurt energy demand, are weighing heavily on crude oil prices.

If Opec+ delivers a “minuscule” output increase, Moya said it could be a very short-term negative for crude.

The pivotal Opec+ meeting will be headed for the first time by Haitham Al-Ghais, a veteran of Kuwait’s national oil company, who took office this week as Opec secretary general at the organisation’s secretariat in Vienna, Austria, following his appointment in January this year.

Reuters reported that Al-Ghais told an Arabic daily newspaper: “Opec doesn’t control oil prices, but it practises what is called tuning the markets in terms of supply and demand,” describing the current state of the oil market as “very volatile and turbulent”.